Do You Have to Pay Estimated Taxes on Stock Gains?

Investing in the stock market can diversify your income. And while stock gains are a cause for celebration, you will owe capital gains tax on the increase in the asset’s value. If this is your first time investing, you may not know that the IRS requires an estimation of taxes to be paid quarterly and not just once a year on April 15th.   

If you plan to sell stock for a profit, you should plan for a tax liability with estimated quarterly tax payments. There can be penalties for not paying them on time. Understanding your tax liabilities and speaking with a wealth management professional can make the difference between good and great investing.  

How to Estimate Capital Gains Taxes 

Stocks and other investments sold at a profit are considered capital gains. Capital gains are the profit you make from selling or trading a capital asset. This typically includes investment property like bonds, stocks, real estate, collectibles, cryptocurrency, or even personal property like a house, car, or home furnishings. 

When you sell stock, you pay taxes only on the profits and not on the entire sale. To determine your profit, your cost basis (what you paid for the stock plus commissions and fees) is subtracted from the sale price.   

Short-term and Long-term Capital Gains Tax 

Both short and long-term capital gains taxes are determined by your overall taxable income. Stocks held for less than a year are taxed as ordinary income up to 37% by the federal government.  

If you have owned a stock for over a year, the IRS allows you to make an estimated tax payment based on your annual income. You can also pay an increased tax payment for the quarter when you realize your capital gain.  

The capital gains tax rate is either 0%, 15%, or 20%, depending on the total taxable income for the year. While most people pay 15%, higher earners pay 20% if their taxable income exceeds the 15% threshold.   

What’s the Penalty for Underpaid Taxes? 

The IRS assesses underpayments if you owe more than $1,000 and have not withheld at least 90% of your annual tax liability. The IRS determines the penalty based on the amount of the underpayment, the period that the underpayment was due, and the interest rate based on the quarter.  

When Don’t I Have to Pay Estimated Taxes on Stock Gains? 

Typically you will always have to pay estimated tax payments for the current tax year if both of the following occur:  

1. Your withholdings and refundable credits result in an estimated tax of at least $1,000 for the current tax year. 
2. The withholding and refundable credits are less than 90% of the taxes on your current year’s tax return or 100% on your prior year’s tax return, covering all 12 months. 

You will not need to pay estimated taxes for stock gains if neither occurs. 

The most effective way to ensure you are paying the correct estimated taxes on your stock gains is to work with an experienced financial planner or accountant. This will assist with the estimation process. A professional can ensure you pay the correct amount at the correct time.